Can the U.S. Lead Global Decarbonization?
Joseph Aldy: So welcome to the Harvard Kennedy School Energy Policy Seminar. I'm Joe Aldy, faculty member here at the Kennedy School and I have the pleasure of hosting the seminar series this semester. Before we get started, a couple of notes of thanks. I'd like to thank the Salata Institute, the Harvard University Center for the Environment, the Environment and Natural Resources Program at the Belfer Center and the Mossavar-Rahmani Center for Business and Government for their support of the seminar series. And especially I'd like to thank Liz and Paul for all of their support,
making everything go smoothly with our seminar series. I'd also like to thank Amanda Sardonis, who's long supported the work through this seminar series. Amanda's about to join the staff at the University of Vermont and help them in what they're doing, but she's been a phenomenal colleague and supportive of everything we've done on energy environment and resource issues here at the Kennedy School and the Belfer Center for quite a long time. I'm thrilled that we have the opportunity to kick off the seminar series, which like last year is hybrid. We are Zooming, we have colleagues joining us via livestream right now, but thrilled to have the opportunity to kick off the seminar with a discussion about what the United States can do in leading the efforts to decarbonize the global economy. We have with us today Joseph Majkut,
who is the director of the Energy Security and Climate Change program at the Center for Strategic and International Studies. In his role, he leads the program's work, understanding the geopolitics of energy and climate change and working to ensure a global energy transition that is responsive to the risk of climate change and the economic and strategic priorities of the United States and the world. Before joining CSIS, Joseph worked as the director of climate policy at the Niskanen Center where he led that group's efforts to research and promote carbon pricing, low carbon innovation, regulatory reform, and other microforms to speed decarbonization. In 2014 and 2015, he worked in the US Senate as a congressional science fellow supported by the AAAS and the American Geosciences Institute. As an economist, I always love being with a PhD in atmospheric sciences who appreciates the elegance of pricing carbon and has developed a greater appreciation as well the politics of this to have a more thoughtful and nuanced view than sometimes we economists might have. But with that, Joseph, I want to say welcome to the Energy Policy Seminar. I'm going to hand it over to Joseph
now who will give us some opening remarks and then we'll open it up to the audience for Q&A. Joseph Majkut: Thank you so much for having me. Scientists are known for their ability to understand the nuances of public policy and not make insane declarations about what should happen. It's really nice to meet you all and I
look forward to a robust discussion. Thank you for having me, Joe and everybody at Harvard. I'll skip the preamble. I was a scientist. I entered the public policy space a few years ago. It's been a very interesting career trajectory. If students want to talk about that, I'm more than happy to spend time later doing so. I've just sort of always tried to devote myself to problems
I find intellectually interesting and being at the intersection of expertise and politics has been a place that I've just found incredibly intellectually satisfying as I'm sure all of you will. Our work at CSIS is by our own design meant to inform public policymaking in the United States with an eye toward what happens outside the United States. And for energy policy that means we need to be attentive to what's happening domestically as well as what's happening abroad. The history of our program is actually I think important here. Our program was stood up during
the energy crisis of the seventies and eighties and the focus for a long time was energy security and that meant relatively good access to oil and gas resources to fuel the US economy. It meant the real close connection of our national security strategy with our energy security strategy and it also gave the US a role to play in sort of providing a global public good, which was a stable environment or stable security environment for the oil and gas industry globally. And I kind of have been interested over the last couple of years, I'm like what roles the US going to play in energy transition that might be somewhat analogous? Where do we try to devise strategic initiatives that can help the US contribute to decarbonization but also give us a role to play that the US policymakers want to see us have. One that's influential, one that competes with China or other countries. And today I want to talk a little bit about what that might look like and happy to hear your feedback. I think there are a lot of people who are trying to paint a picture
of what that should look like, but no one's really quite sure what it will. The title of the talk, I can't remember what it is, can the US lead global Decarbonization? It's not meant to really mean anything specific, but it's meant to kind of probe at those questions of how do we create global public good with the politics that we have here today? A couple of places where I think US climate leadership has actually been important. I actually think it was important for establishing the Paris Climate Agreement. Paris Climate gave us long-term climate goals, two degrees centigrade, well below that toward 1.5 C, and I think the US having a relatively ambitious regulatory program under the Obama administration went to that.
I think the US having a diplomatic effort, which brought China fulsome into the fold was important to that, helped resolve this sort of developed versus developing nation conflict that had kept climate talks from really being global in scope or setting global goals. And I think it's interesting to ask now, okay, we're about to do this UN stocktake, so are we leading on emissions? That might be the place to start. That's the thing that drives global climate change. We know we need emissions to go to zero or net-zero,
but we know we need to get them to zero if we're going to arrest the march of global warming. And skipping some stuff that I think is uninteresting now. UN stocktake is taking place this fall. So I think we also want to know where's the US standing amongst all the other countries.
UN report from this month shows that emissions will probably peak and then maybe peak or slightly fall over the coming decade. This is based on what countries have pledged to do so we have a somewhat long plateau for global emissions and we kind of find ourselves, I think now near the peak, if not beyond it. And that's challenging for a world that wants to get to 2C. Long-term, the UN's assessment finds that we're probably targeting a world that looks at like 2.5 degrees centigrade by 2100. It's a remarkable victory over where we were a decade and a half ago when I started working on this issue. We regularly talked about four or five degrees centigrade global warming by the end of this century, but it's a far cry from where we want to be. And the stocktake also assumes something that I think is relatively important. That countries
are going to buy and large meet the climate goals that they've already set for themselves. The US, under the Biden administration has made a ton of progress and probably wants to go to climate meetings this fall saying, Hey, we're doing it. We've got it done. We rejoined the Paris Climate Agreement, but on top of that, we've accelerated our national ambition. So
we're now saying we want to cut our greenhouse gas emissions against the reference value 50% by 2030, 50 to 52 I think is the exact number. We passed the Bipartisan Infrastructure Law, which is going to make a ton of investments in clean energy technology. It's going to keep our existing nuclear fleet alive. And then last year we passed, the Congress passed on a partisan basis, the IRA, which is going to turbocharge clean energy investment and I think justifiably you can claim it already pretty [inaudible 00:08:25] in the outlook for US greenhouse gas emissions.
So what if we measure right? There's a paper in Science this summer compiled modeling results from nine different groups. Did anybody from Harvard participate in this? [inaudible 00:08:39] at all? Maybe not. Nine groups, they found that in the presence of the IRA, economy-wide greenhouse gas emissions from the United States should fall between 33 and 40% by 2030 against the reference value, which is 2006 for weird historical reasons that we can just leave unaddressed. It's a notable but not extreme improvement. In the lack of the IRA, those same modeling groups find the expected fall would be 25 to 31%. The underlying economics of clean energy and the policies in place at the state level already meant the emissions were supposed to fall in the United States, especially in the power sector, but now the United States is going to spend handsomely on reducing emissions. We get another five to 10% out of it. Science paper admits that the abatement cost is somewhere between 27 and $102 per ton of CO2. That's what we're paying to reduce. Average of $61 a ton. That compares favorably to
reasonable estimates of the social cost of carbon. But since Joe Aldy's here, we'll also say that it compares disfavorably to the cost. If we were to impose a carbon price, which we could get away with a much lower number and get the same emissions reductions. Joseph Aldy: Thank you. Joseph Majkut: You're welcome. But compared to our goal, we still find ourselves wanting. The emissions gap is set to be somewhere between a half and a gigaton
of CO2 per year in 2030 between what our ambition is and what the IRA is slated to accomplish. And that is of course, if we can actually finance site and deploy all the stuff that those computer models think will be economical in the presence of fairly handsome tax credits. I think that that is definitely something we're going to have to work toward through permitting reform or other things. I'm going to box permitting reform. If you guys want to talk about it in the context of the conversation, that's great, but I do not want to waste the hour on it.
Let's compare that to the global gap in ambition. And there I think, I discovered this past week, the IRA is actually kind of a rounding error, which I think is weird. It's historical investments in climate and in energy, but the UN estimated the gap at 2030 for 1.5C. If the world was really going to do it at 20 to 24 gigatons of CO2.
So an ungenerous comparison says that you need 40 IRAs. No one else in the world has the fiscal space to do an IRA level amount of subsidy, but you need 40, well maybe the EU, but you need 40 IRAs to accomplish the emissions reductions necessary to get on a 1.5 track. And for 2C where you need about half the emissions reductions by 2030, you need 20 IRAs. So we find
ourselves in this funny place where we are making big investments and we are really changing the nature of the energy system in the United States, but it is woefully too little for the challenge we face globally and even against our own goals. We're going to find ourselves falling short. But I think it's also important to note that US climate policy and I would say global climate policy are also changing. That the goal or the emissions reduction is an important geophysical metric, but it's not the only metric along which governments are trying to devise climate and energy policies. Over the past few years we've seen governments take very different routes and a different approach. We now have policies based on industrial policy, investment, building stuff, trying to capture the value that everyone anticipates will be associated within energy transition. And as capital accumulates in those different emerging industries, we expect costs to fall, learning by doing. And then one of the key arguments that we now see our political
leadership making is the IRA is maybe going to miss emissions targets. Maybe it's not really an emissions policy, it's an industrial policy. It's going to reduce the cost of clean energy. That clean energy is going to proliferate around the world and that is a global public good in and of itself. It's a different externality than climate, but we can approach this one through subsidy. In stylized models, we're also starting to investigate what that looks like.
Rhodium Group published a paper just over the summer trying to understand, well if we get cost reductions in the technologies that the IRA is supporting, the not out of line with standard learning by doing models, and then we have a world, there's a sneaky part in the modeling, but then we have a world that really cares about climate change and the institutes a global carbon pricing regime. What is the amplification of the emissions reductions that we get out of IRA around the world through reducing costs. And they found between now and 2100 an amplification factor of what I would say is 2.5. Amplification factor is vocabulary I'm using. It's not vocabulary that's in their paper, but that's a kind of like a carbon
value associated with this learning by doing. It's also interesting because if the US can make those technologies cost competitive in the global landscape, you're also talking about export value for the US. We really like export value in oil and natural gas. Those have been good for our economy. They create all sorts of opportunities for economic statecraft and the clean energy transition can do the same thing. Boston Consulting did a study also within the last year looking at IRA technologies, finding that the potential export value across the ones where we might be able to carve out a competitive position against China, which we'll talk about in a little bit, is like 20 to 30 billion within the next decade. That's the same size as today's LNG industry. It's the size of our grain exports. You're talking about clean energy
being not an overwhelming export commodity from the United States, but a relatively sizable one. How do you do it? I think realizing that requires a total reframe of how the US engages internationally on climate. I'm just not convinced personally and I'm willing to argue about it because I could be totally wrong. That the future of climate leadership
is going to big meetings and saying, we're doing this and we want you guys to do this. I think the persuasion we're going to have to leverage internationally is going to be much more about it's in our common interest to share these technologies to arrive at a new kind of trade agreement and that the terrain for US leadership on climate is going to look very different than it has over the last decades. We were successful and we did a good job, but the problems we face now are going to be totally different. That's because the energy transition is largely like this physical thing. It's an engineering problem, it's a political problem,
it's a science problem, but we have large systems for fossil fuel production distribution and use that have to give way to systems that will depend on minerals on infrastructure and technology. My former colleague Nikos Tsafos who's now the chief energy advisor to the Greek Prime Minister in his final essay for CSIS wrote about this in a way that I'd like to quote. He noted that, "Oil, gas, coal chemicals today together account for 40% of all shipping traffic. The move away from fossil fuels to low carbon energy sources will change what international trade meets." That's not just the rules, it's the stuff that gets moved around. Returning to the quote, "And this shift presents enormous strategic challenges." What are those enormous strategic challenges and can the United States play a role in addressing them? Returns us to my original question of what is US leadership and how do we carve out a positive role for ourselves? It's helpful to sketch the characteristics of the net-zero economy before we think about the tools we want to deploy. Take the IEAs net-zero economy study from
a couple of years ago, too much hullabaloo about the timescales and some probably poorly phrased things about implications of a net-zero economy for fossil fuel investment. They actually do a really great job of trying to understand what does the energy system at net-zero look like and that's going to be relatively invariant, I would argue whether we get there in 2040, 2050 or 2070. And they find that in that scenario the oil market is much smaller than it is today, but it's probably going to have to be really emission sensitive.
And so for the US as a large oil and gas exporter and one that's probably going to be in a position to export more as we reduce our own consumption, trying to build an oil and gas market, excuse me, that's really, really good on methane emissions. That looks at the emissions intensity of the full value chain and has at the combustion side as much carbon and capture utilization and storage technology as we can feasibly muster. It's crazy important because that's a place where we have an immediate economic and strategic advantage. The mineral economy and the net-zero world is going to
be much larger. So if the oil and gas economy sort of shrinks down to 20% of today's current size, that's a factor of five smaller. The mineral economy probably grows by a factor of five. I think that's a coincidence. I don't think there's some rule of nature that causes that to be the case, but we don't have at this moment a particular strength in the mineral economy. We dig a little bit of stuff out of the ground in the United States, but it's really hard to do here. We also don't do a lot of the processing or intermediary manufacturing steps that have ended up to be really important in how markets and those commodities get set up. The US probably needs to develop a strategy for that. If anybody has any
brilliant ideas on what that strategy should look like, I have a think tank job for you. And then lastly, they're going to use a whole different suite of technologies and the technology innovation place is where the US probably has a chance to carve out a new and revised role for itself because of the IRA. Okay, so there's a couple of transitions here, got sidetracked. First is minerals. That's shifting the extractive economy away from coal,
oil and natural gas toward cleaner and then to mining. And the second is industrial. That's the technology story. No one gets energy services from a lump of copper. Instead, we need to establish a supply chain that can give the world solar cells, wind turbines, batteries, heat pumps, copper wire, hydrogen electrolyzers, carbon capturing membranes, all this machinery of a high renewables net-zero economy. And at the moment, China dominates the supply chain for almost all that. Part of the enormous strategic challenge that I think Nikos was talking about is we have to build a larger and more diverse supply chain for those goods really, really quickly to supply a net-zero economy, to make it easier for countries to reduce their own emissions and in doing so, we have to trade an energy system that's relatively diverse. OPEC Plus is super powerful in establishing market
prices, but we get oil and gas from all over the world. There's a lot of energy security that comes from that. These are really sophisticated markets that can respond to perturbation well, with one that's heavily concentrated in a strategic adversary of the United States. I'm not particularly China hawkish, I will admit. In Washington these days. That's kind of the
favor, but there's all sorts of reasons why you want to pursue resilience through diversification. Just to give you a couple numbers on that, because I think there actually is risk to this. At each stage of the clean energy supply chain, China has a commanding lead. For critical minerals, it produces more than 90% of the rare earths that make magnets for turbines and motors. Produces more than 90% of the world's polysilicon for photovoltaics and
that has real issues for human rights, forced labor concerns regarding Xinjiang province. It refines 70% of the world's cobalt, more than 60% of the lithium. Both are critical for batteries. And one of the key insights that industrial policy does give us and can help us develop is that that whole supply chain matters. If you have the intermediate step, if you're doing production of a certain kind, that gives you buying power on the upstream that helps set the conditions for the labor and minds in the Congo that you otherwise don't really have a lot of power or influence to do anything about. And it's also a matter of economic strategy if we're
looking toward an energy transition. It's a lot of value that's going to be gained from being able to support manufacturing facilities or be a part of this technological story. The IRA is designed to do that. Sorry it took me so long to get to IRA, but part of the criteria of the bill, even the most severe onshoring provisions, which contravene decades of global economic and trade policy are about bringing the benefits home. And I would say that the argument in Washington it's like kind of true, is that if you didn't have this sort of protectionist, hawkish onshoring component of the IRA, it would not have been as large or as ambitious as it was and it may not have passed at all. Even in a democratic
controlled Washington. Policymakers need and want to demonstrate early wins for their constituencies and the coalitions that will back continue to action to reduce emissions over time, and that's what the IRA is trying to solve for. And it's totally clear that this is kind of working. I'll take one example, but there's a few others. I don't really, I'm so tired of talking about EVs, so I was going to talk about solar. Is that okay? Okay. EV's in the question period. US right now has eight gigawatts of solar manufacturing capacity online, which actually is not terrible, but most of it's at the final stage. So you're assembling from constituent
materials to modules. This is the stuff that you actually put into a field or on your roof. Right now, I think Wood Mac when I last looked expects, so we're going to install about 30 gigawatts of solar capacity in the US. So we actually produce at the module level a relatively fair bit of what we need. Let's say you're going to get on that climate path. The Princeton group led by Jesse Jenkins does some really interesting modeling trying to understand the material needs of energy transition for the US. I would say a rough number, though their scenarios vary, is you're going to need about 70 gigawatts of solar capacity additions in the United States by the end of the decade every year. That's a significant public policy challenge in energy markets and in land use and a whole bunch of other things, but you also just need the stuff.
And for the stuff, the story is actually kind of interesting. Post IRA, if you look at industry data of announced projects by 2030, we might have up to 85 gigawatts of solar module manufacturing capacity online in the United States because there is an enormous tax credit for making solar modules in the United States under the IRA. Those tax credits are also slowly affecting the upstream. So we're looking at 43 gigawatts of solar cells. That's the little circle that you pack into modules, 20 gigawatts of silicon ingots and wafers and seven gigawatts of inverter capacity. So the subsidies are driving an onshoring of this supply chain that'll help meet US needs, diversifying and enlarging the global solar supply chain in a way that's pretty helpful. There's still a sort
of like if you have 85 gigawatts of solar modules and you only have 20 gigawatts of wafer capacity, you still need to use a global supply chain. You can't be [inaudible 00:23:36], cor should that be the goal, but there is a pretty significant set of investments that's being made here. The same story is happening in EV supply chains as well. We're seeing a lot of announcements about battery factories and that's now sort of bleeding down into the upstream parts of that supply chain. The problem is that onshoring comes with at the cost of efficiency. You have to subsidize production here in the United States because it's more expensive to make solar panels or EV batteries here. US DOE estimates that domestic manufacturing
of solar panels cost 30 to 40% more than in international markets. That may come down a bit as we learn how to do here in the US, but a lot of it is labor and high margins expected on investment in the United States and those things aren't going to, I don't think structurally change, nor should we design climate policy so that they have to. It means it's unlikely we're going to become a significant exporter of solar technology. We're
just, under IRA, we're going to pay more and use more, a domestic of supply chain. But for alternative technologies, we actually might find opportunities. A good example here is this case for First Solar. So First Solar is they manufacture solar equipment here, they're a US based company. They manufacture here in a couple places in Southeast Asia.
Totally different chemistry than the crystal and polysilicon that we typically associate with the falling costs of solar. I don't want to get into a debate over which one is better, but part of the diversification shouldn't just be geography. It should be like technology. Maybe we need to find competitive routes to developing technology that US firms can support. We do a bunch of innovation at our fancy universities including here and the neighboring institution as well. And we want
to find a pathway that they can, when innovation happens here, it gets supported, it gets deployed, and then it can be exported because that's where we get amplification of our efforts. In December of 2021, the Development Finance Corporation made a $500 million loan available to First Solar to develop a manufacturing facility in India where they can make their solar cells for deployment in the Indian economy. India has truly ambitious targets for deploying solar power to meet their energy needs and development needs. They also want factories as part of their
economic development story. So there's a fairly robust industrial policy going on in India. It can be matched by investment from US and suddenly you have kind of an interesting story developing where the US can provide technology and financing to help a country that is really important in geopolitical jockeying right now, meet its climate and energy goals, diversify its own energy supply and there there's a real win-win here and I think finding those opportunities is crazy important. The key question is I'm not sure how to make a list of the next 10, 20, or 50 projects that should receive that kind of support. And we probably structurally can't put all this on the shoulders of the Development Finance Corporation. If we want to decide that's a pathway to the US being a climate leader by helping other countries establish their own role in the energy transition, meet their own industrial policy goals, I think we're going to need to think carefully about what are the conditions under which we want to do that? Which technologies, which manufacturers should the US support? We have a long history of nuclear diplomacy. Are we going to pick that back up? We have recent experience with LNG, but which technologies that are on the frontier? Green hydrogen, carbon capture and utilization, long duration storage. How do we help create strategic
diversification without undue cost is a really big question. I think this is totally available for intellectual and academic scrutiny. How should we score that kind of investment? I can kind of talk at a diagnostic level of why we think it's good, but how much we should be willing to spend and where we should spend it and how we should think about strategy. And
one that changes over time as the technology and policy, as the relative cost of technology change and as the strategic interests of other countries change, I think is totally rich and interesting. Now we can talk about trade. I also am totally into climate clubs because the other thing that has to go on is we've got to rewire trade. I also think that it is possible that climate clubs help us move toward a world where we have more efficient instruments. I don't think you want to create a world where you just got industrial policies everywhere. People are fighting over who can own this piece of the supply chain, who can control this piece of the supply chain. We need to make sure that we sort of like,
oh, this is flagrantly illegal in the eyes of the WTO. We need to make sure that on the process of trying to decarbonize, we don't break world trade or lose the efficiency that has been so good for global economic growth and therefore just screw up a bunch of other things in the attempts to solve the climate problem. There's a couple of guidelines here that I think are interesting. Trade lawyers talk about a lot of this stuff, but can we develop a trading framework that's going to accept these kinds of subsidies on a temporary and targeted basis? Can we accept it in others? There's now this enormous trade case that's about to kick off in Europe regarding the import of Chinese electric vehicles and the boundary between just better technology and stuff that has been over subsidized and is being dumped is hard to draw. And I think we're just going to have to work really hard to figure out where we want draw the lines. But an even larger scale, I think it's important to think about the trade agenda in the era of energy transition.
US is embracing protectionism. Other countries will do the same. Europe's also standing up a carbon border adjustment mechanism. For the first time it starts next month, companies that ship certain products to Europe are going to have to report the CO2 emissions associated with them and in a couple of years they're going to actually have to pay as if they were paying into the European emissions trading system. Pretty textbook carbon price and border adjustment policy design. But it's immediately causing political challenges. It's being challenged at the WTO and there are threats of reprisal. Officials, I think from India. I was writing this morning, I couldn't find the citation, but I know what
happened. Have even threatened like we're going to border adjust European goods but not on their carbon content, on the historical emissions associated with the European economy. So you already immediately tools which look really good in the academic and intellectual sphere, in the political world look really, really challenging and could cause all sorts of downstream problems. By the same degree the picture's mixed. Other countries look at the European Sea Band and start going, oh, maybe we should carbon price because that way we will capture revenue that would otherwise go to Europe and we would don't want that to happen and we would then have smoother trade with European colleagues. Examples here are Japan and Turkey. Biden administration I think has been relatively ambivalent about the EUs border adjustment, but does support integrating climate and trade on a more sectoral level. So they've backed the global arrangement
for sustainable steel and aluminum which would have the US and the EU cooperate on standards for the emissions associated with the production of those two goods. And there'd be trade censures for countries outside those two who wanted to import steel and aluminum into the US or the EU. But also, like I said, I've spent a lot of my time trying to figure out how do we build a bipartisan consensus around climate change? How do we make progress at the center of American politics? And I can tell you without a shadow of a doubt, the interest in carbon tariffs, border adjustments, some sort of trade and climate tool is extremely high on both sides of the aisle in Washington, for different reasons and we need to figure out a path through that. But there is this widespread belief that the US economy is more carbon efficient, even in its most carbon intensive places than other economies, particularly China. So the more we account for carbon and traded goods, the more competitive our producers will be. I'll insert her parentheses here. The carbon pricing advocate in me must say, this is a sunk benefit if we don't have a commensurate domestic policy to keep industry competitive in a climate adjusted trade world, a carbon tariff without a domestic compliment gets the incentives I think to innovate exactly backwards if I've got that right professor.
So we just need to be thoughtful in designing these things, but they're potentially really, really powerful. I looked at a lot of the academic literature on climate clubs over the summer trying to understand should we devote a lot of time and effort to build these things. And some of the proposals that we found are like show that it can be remarkably good at reducing greenhouse gas emissions globally. And I would say even that the academic results show that
a US led carbon club can probably be the most powerful tool that we have in our arsenal for reducing greenhouse gas emissions. Let me cite an example. 2021 working paper Farid Farrokhi, I don't actually know how to pronounce his name. F-A-R-R-O-K-H-I. And a co-author showed that under ideal trade censure, a US led climate club could reduce global greenhouse gas emissions by 61% as other countries joined in, based on their own incentives to join. And the chain of countries is actually super interesting. So they actually modeled it. It's cool. I'm going to quote it. You start with the EU and the US, big markets right?
Next is Canada and a bunch of small countries. Then you get Australia, India, Japan, Korea, Mexico, Russia, Turkey and Taiwan. Once all those are in, it's in the economic interest of China to join your climate club. And then last you get Brazil and Indonesia. Once you have all them joining, to join, you have to institute a set of optimal carbon taxes and production taxes. You need to set up border taxes for those outside the club, but you sort of get a forced cooperation, which reduces global emissions by 61%. Only 8% of that is
due to the use reductions in the US and the EU according to these modeling studies. So that's a much larger multiplier of American effort than we get on technology. Yeah. Speaker 3: Can you define a little bit better what carbon club means? Joseph Majkut: Yeah, totally. So it's totally different from a carbon tariff. Oh no, I'm all good. So a climate club in this context, to be a member, you have to have a carbon price on your domestic production, and then you need to have trade censures on non-club members. And those trade censures extend beyond carbon border adjustment. So
the other thing that this paper shows, and one of the things I think we need to be cautious of as US policymakers looking at carbon border adjustments and other tools, is that carbon border adjustments up are relatively ineffective at reducing global emissions. So in a climate club you have a trade censure, which I think applies to basically all trade. If you're outside the club, we're going to put some censure on you associated with the carbon intensity of your economic production. And a carbon border adjustment, you're only doing that on the carbon embedded in certain products. This is what the EU is doing. But you're doing that to bolster some sort of or prevent unfair competition for people who fail your domestic carbon price. And then in a tariff
you're just assigning some tariff associated with the carbon in goods that you want to import. That leaves aside any domestic climate policy. So that's how I would use the language. So the climate club is a much more expansive version of what a lot of policymakers are talking about now, which is more on the tariff and border adjustment scale. It's really focused on carbon embedded in products, not a broader economic measure. That makes it a much more challenging thing probably to achieve and probably why it ends up being so powerful. Yeah.
Speaker 3: [inaudible 00:36:19] another question. So how strong and absolute is a trade censure suggested, it's not a tariff and is it a total ban, what's the spectrum of measures? Joseph Majkut: I think it's a large import text, but I didn't find in the paper a graph that shows you how large it is. There's a bunch of very complicated equations. I'm betting it's expensive. You need it to be big enough to incentivize people to join. So one thing I think is really interesting is can we engineer something as powerful as those climate clubs or something that gets some of that power from where we are today, where we're much more focused on industrial policy, technology solutions. We have reluctance to embrace carbon pricing at the domestic level, but we do see a willingness to link the climate agenda with the trade agenda to protect domestic industry and to capture some advantage or perceived advantage. I have some ideas for how that worked, but I think we can talk about in the discussion.
I think that's kind of the next very interesting opportunity for finding a path to progress in the US. I think it helps a trade agenda, which is climate and industrial policy smart will help us amplify our own efforts out of the IRA. And I think that gives me a sense of what the US leadership stance on climate may look like. It's a little hawkish, but I'll start there. I'm actually
going to stop because I hit 40 minutes and that's about what I wanted to target. I'll close with two things. I want to thank Joe for having me and I really look forward to a conversation. Joseph Aldy: Great. Thank you Joe. I'll open with the first question and then we'll open it up for questions from the audience and we'll run until 13:15. And as a reminder to everybody
when you get the microphone, a question is a sentence that ends with a question mark. Joseph Majkut: Goes up at the end. Joseph Aldy: So you talked here at the end about the idea and the potential for climate clubs and I want to ask two questions about this. One, and I reflect on this to a conversation I had with a representative of a developing country when I was in the US government and they noted, United States, we can sometimes be selective on when we decide to work through the UN. And they noted that the problem for them is the UN only forum where they actually get a voice. And so it's frustrating when the US kinds of
selectively engages through full global multilateral processes versus doing something bilaterally or in a small group. So you began today talking a little bit about the UN stocktake, but closed a lot of discussion on what is small clubs that may grow over time if we create the right kind of incentives. So how, if you were to say advising the US government, you're trying to get other countries, you're trying to amplify your impact, you're trying to get more countries involved. How do you think strategically about this mix of fora that you're going to operate through? When is it in your interest to use an existing global forum like the UN negotiations? When should you strive to create fundamentally a new form, this kind of trade climate, industrial policy, maybe that's reinvigorating the WTO, but there's a lot of a WTO reinvigoration plate beyond just this. So how do you think about the
strategically, how would the US effectively engage through these different fora? And then I have a second question about clubs and supply chains, but we'd love to hear this first. Joseph Majkut: Yeah, the answer is probably related. I am a believer in small coordinated clubs making progress and then bringing that back to the larger fora, excuse me, for diffusion and amplification. I think that's very consistent with the model that Paris sets after the Glasgow conference.
I remember writing this really excited essay about the First Movers Coalition and these plurilateral deals around just transition. Some of those things have worked, some of them haven't. As we learn what is going to be effective in navigating this relatively challenging set of considerations, I think I'm a fan of smaller clubs. I take well the point that there is, not a discontinuity, there's a slight contradiction. If what you're saying is, man, the climate strategy of the United States should be economic integration and we should be funding stuff relative to the needs of other countries, especially in emerging markets and developing a strategic technology portfolio. And then we should hammer them with these trade censures if
they don't act right on climate. But that's where I think these are intellectual tools that we need to draw lines between when we're trying going about policy entrepreneurship. Joseph Aldy: So the other question I have is there's this vision of we're going to create climate clubs. We're going to have this kind of carrot and stick approach depending on whether you're in the club or out. We're
going to use trade sanctions on those who are out. We also have at the same time this kind of emerging model in US policy that's very much about onshoring. That if anything is to design an energy economy in the United States, and for that matter, there are those who think about this beyond the energy and climate space where we just produce more of what we consume in the US. If we're in a world in which we're transitioning in the energy system, so there'll be less trade by definition in fossil fuels and related commodities. If we think we're going to be doing more of meeting our needs through domestic manufacturing. If other countries try to follow our suit, do we lose some of the leverage on trade if we're seeing more and more of a domestic oriented climate and industrial policy among our major trade partners? Joseph Majkut: That's an interesting question.
I think yes and no. So just because of good is not part of the energy system, doesn't mean that it's not important to greenhouse gas emissions. So what would be a good example like steel. Steel is super important for the energy economy, but it's way more important than other parts of the economy. That's where most of the consumption is. And so if you're using trade tools to help decarbonize steel, then I'm not sure that the energy transition is going to perturb trade enough to cause that to be a problem. But your broader point of if the world gets super geopolitical and trade relations are just really being perturbed, does that cut off the ability of trade sanctioning tools to drive decarbonization? I suppose it's possible, but there's just so much trade. It's hard to
imagine that will be what happens in practice. I admit it's an interesting question though. Joseph Aldy: So let me open up for questions because we have colleagues joining us online. We're going to pass around the mic. So please wait for the mic. I'd like you to introduce yourself and then pose the question. Kevin: Thank you for the presentation. Thank you for being here. My name is Kevin, I'm a second year MPP student. One of the big hot topic right now at UN COP is climate finance. I wonder what your vision for US leadership on climate finance is going to look like. I just want to note that it
seems that US currently is not giving or pledging enough financing towards developing countries, but also at the same time it seems that a lot of them are, or at least have recently joined the BRICS Bank or over the past couple of years become members of AIIB, which I felt like there's more of a economic incentive for them to align on receiving financing from countries led by China, for example. So wondering what your thoughts on US leadership in that space looks like. Joseph Majkut: Yeah, that's a great question. Completely. I left it completely open. One, we should definitely stop over promising. I think that's a persistent issue.
We've been working on a paper trying to understand if there's interesting technical tools and we're not the only people doing that. Can you make the cost of capital lower at the same amount that we were already given to MDBs and other things? I do think eventually the US is going to have to figure out are we willing to make the energy transition part of our economic statecraft? And that's where I think these things like the DFC investment are really important. Do we have a particular obligation or are we going to be particularly helpful? Just practically speaking, like funding a lot of renewables projects in emerging markets. I'm not so sure, but if we can help make renewables projects in the self-interest of countries by distributing manufacturing or helping set up regional centers, I think that's a more saleable option. That's what the government is trying to do right now with the PGII and other tools.
Kevin: What's the PGII? Joseph Majkut: I can't remember. The Partnership for Global investment or- Kevin: Infrastructure? Joseph Majkut: Infrastructure Investment. Yeah, I think that's probably the route forward rather than us just like selling foreign aid in Washington is super hard and climate investment thus far is read as foreign aid. We need to shift the frame in which people see climate investment in our political leadership.
Yumna: Hello, I'm Yumna. I graduated last year, but I work here now. Joseph Majkut: Oh, cool. Congratulations. Yumna: Thank you. So my question is about the EU carbon border adjustment mechanism. You said there's interest in both sides in the US for something similar, A, because the US has advantage in terms of energy efficiency and two, because it's a very efficient way to cut emissions. So my question is,
recent evidence shows that countries that are likely to lose the most in terms of growth in exports and GDP are not high emission countries like India and China, but rather poor countries in Africa who are just very carbon intensive in terms of exports. So I wonder whether that debate in Washington takes into account this maybe global equality lens and how do you think the US climate leadership can maybe take these potential losers into consideration? Joseph Majkut: That's a good question. I think this also, if I can wing it a bit, I think unfamiliar with the study, my guess is there's this big debate in Europe should they use some of the carbon border adjustment revenue to aid countries or help in the decarbonization. Because if you just have a bunch of carbon intensive production going on, even in an emerging market, that's not exactly what you want to have over the long term. So some sort of investment scheme in that context makes a lot of sense. I don't think that won out in the end. I think the EU decided to hold onto the money. For the US, I don't know how much of an issue that would present. So I will say if you think
about how do you construct something that you think is going to be politically feasible that would combine climate and trade and investment and technology like cooperation, there I think there's a pretty significant role for the US to say we want to onboard countries into trade arrangements that help decarbonize that support decarbonize early on, but see a pathway into a more climate club construction. That would be the way I would think about addressing that challenge. Brian: Hi, I'm Brian. I'm first year MPA ID student. So I have two questions. First is on the carbon club. So my question is what is the risk that the carbon club isolates the US instead of positioning
in a global leadership position? Because given the cost of decarbonizing, given the carbon border adjustment mechanism, how I could see it is that a bifurcation of trade roots and that would isolate the US instead of position as a global leader. And the second question I have is on green investments. So would green investments be better position as invest into grid and long duration energy storage instead of renewable energy investments given that renewable energy is really cost competitive with coal and gas in many countries? Joseph Majkut: Repeat the second question in a shorter version, please. Brian: Sure.
Would it be better to invest in grid transmission and long duration energy storage, LDES in developing countries instead of renewable energy given that renewables such as solar and wind are cost competitive with coal and gas in many countries? Joseph Majkut: So the answer to the second question is very context specific, but I would love to learn more about it. So the picture of energy and climate finance is in my view, kind of still micrograde focused. Because we're very sensitive to the needs of developing economies, but the energy system that we need to build has to be big and diffuse and have transmission. So to the extent we can invest in that kind of stuff, which I think is
also what PGII and other sort of emerging American models are trying to do, that's really good. There's also just, it's like the dams of the 21st century. Multilateral banks aren't going to build a lot of dams I don't think, but you could imagine building big regional grids and stuff like that, carbon capture facilities the same way. If you want to get to net-zero, every integrated assessment model I've looked at says you need a lot of capture around the world. I don't think that's only going to be in the United States and the Middle East. And so financing that kind of stuff is going to need a lot of help as well. My bet is, anytime you're playing with trade,
it's like a very dangerous game. So you want to be a little bit careful about the policies you set up because the urge toward protectionism and self-isolation is probably enormous. You want a world that has low carbon trade being relatively free to capture the benefits of free trade and you're using trade as a tool to incentivize people moving toward that world. I don't think you want to lock it in. I think that that's a real risk.
Will: Hi, my name's Will. I'm an MPP1. So the US sometimes suffers from strategic inconsistency. I think a recent example of that would be pulling out of Paris and then subsequently rejoining it. So from your perspective, is there a way to insulate
US participation and leadership in some of these initiatives that you've described going forward? Joseph Majkut: Yeah, I think so. Say you wanted to build a strategic technology portfolio for the US. If you can build a coalition of industry and business interests that want to see that sort of expansive investment abroad, that can have a stabilizing force. I'm not saying it guarantees it a hundred percent, but if you convince enough political elites in Washington DC that your program is important and works well, it usually maintains support even between fairly substantial partisan shifts. On the climate and trade nexus. This is a place where, like Robert Lighthizer was Trump's trade guy, wrote in his book, defensive carbon tariffs.
Probably on a protectionist favoring the protectionism more than the climate stuff. But it gives us a place to think through, okay, if I can anchor here and then I can anchor over here on a more textbook climate, carbon pricing and border adjustment tool, can I start drawing the lines and finding something that is approachable from both sides? I think that's how I think about it. Yasmina: Thanks so much for your talk, Joseph. My name's Yasmina. I'm an MPP1. I've got two quick questions. The first is you talked about the desire to onshore supply chains for renewables and deepen our supply chains domestically. How do we go about the conflict that is likely to arise with environmental regulation? I'm thinking with these rare earth materials like Neodymium and those which are used in permanent magnets, they are often quite toxic and often our environmental regulations create obstacles to us now domestically mining them and refining them. The second question is, are we doing enough to make sure that we're supporting the right technologies and regulating the way that they are rolled out? I'm thinking about biomass energy and carbon capture, the potential adverse incentives to cut down a lot of biomass, maybe unsustainably and also doing CCS safely.
Joseph Majkut: Okay. I think that we do not want to sacrifice environmental quality in the context of pursuing these things, but for heavy and light rare earth, we are making investments in processing facilities in Texas. My guess is that they have to pass some sort of Clean Water Act evaluation, and so we should try to do that stuff under the highest environmental standards possible. That's also, at least given the express preference of policymakers in DC, what they would like to see. A lot of complaints about the Chinese supply chain is that it's captured the market by
being dirtier and less controlled, not just in a carbon sense, but also on water and air issues. Do I think those are in absolute contest? No. Do I think that that might impose costs or have price effects? Yeah, sure. And it could delay projects. On the, are we supporting the right technologies to the right degree? Oh, man. No, not at all. You think about the construction of the IRA, it's an economist's field dream. Why did we give this one 30% and why does that one get 25% and why does
this one get 3 cents a kilowatt or $3 a kilogram, and why does one get [inaudible 00:55:09]. It's nuts. And there's no ability or there's no mechanism to harmonize that kind of stuff toward more efficiency, which is something we should really also be thinking about doing because those tax credits only, well, most of them end at the end of the decade. I don't have particular comments on biomass with carbon capture and storage. I read once that it's potentially really bad for food security and I sort of believe that.
I think on the carbon capture and storage front, how do we do it safely? I suppose, what do you mean by safely? Are you concerned about leakage from reservoirs and all that kind of stuff? I think we can monitor it relatively well. I'm not overly concerned or I've never seen any reason to be overly concerned about safety or catastrophic releases of CO2, like the incidents with the lakes. Coming from a more industrial process. I actually like industrial carbon capture and storage because it's the carbon management technique where there's a valve with a dial and it tells you how much CO2 went down in the ground. It's much easier and more tractable, I think to scale in that way than a lot of the nature-based solutions are probably going to be. Anurag: Hello. Hi, I'm Anurag. I'm a postdoc here. I wanted to ask you about, since you mentioned First Solar, I'm curious, one of the reasons First Solar has I guess stayed in the US and stayed out of China is because they have historically received a lot of support from the government and marketed themselves as an American company. But
in the long term, people claim that if you want to gain efficiencies in manufacturing, China is the place to be in terms of scale and also just competitiveness in terms of factors of production. So what should the US strategy be broadly in terms of any new technology? Because any corporate company will want to move to China to gain that advantage in terms of cost reductions and First Solar has avoided that path. You gave that example, but it seems difficult for a lot of companies to avoid that kind of transition into China because of their manufacturing capabilities. So how do you think of the US manufacturing strategy in the long run? Joseph Majkut: I think we should make it as easy and as inexpensive to produce stuff here as you can. So like permissive investment environment for
investment. I think there's a role for permitting reform, not sacrificing environmental quality. I think, if we're going to choose to onshore, as I said in the talk, we're also choosing to spend a little bit more and that's going to limit global competitiveness if you want to create an export market, and that is something that our policymakers have decided to do. Hopefully we can capture some innovation and be a little bit bet